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OCZ Technology (OCZ)

F3Q11 Earnings Call

January 10, 2011, 5:00 p.m. ET

Executives

Ryan Petersen - CEO

Arthur Knapp - CFO

Analysts

Alex Kurtz - Merriman Capital

Rich Kugele - Needham and Company

Steve Glass - STG Capital

Presentation

Operator

Good day and welcome to the OCZ Technology Group's fiscal 2011 third quarter conference call. [Operator Instructions.] And now I'll turn the program over to Bonnie Mott, investor relations manager of OCZ. Please go ahead.

Bonnie Mott

Good afternoon and welcome everyone. On the call today are Ryan Petersen, CEO, and Arthur Knapp, CFO. Ryan will provide a business overview and then Art will review the firm's financial results. Following their formal remarks, we will open the floor to a few questions.

Before I turn the call over to them, I need to remind our listeners that remarks made during this call may contain forward-looking statements that involve risks and uncertainties. Forward-looking statements on this call are made pursuant to the Safe Harbor provisions of the federal securities laws. Information contained in the forward-looking statements is based on current expectations and is subject to change, and actual results may differ materially from forward-looking statements. Some of the factors that could cause actual results to differ are discussed in the reports filed with the SEC. These documents are available on OCZ's website, www.ocztechnology.com.

With that said, it is now my pleasure to turn the call over to Ryan Petersen.

Ryan Petersen

Thanks, and good day to all of you. As you know from our prior earnings calls, OCZ has spent the last year focused on transforming the company from being a niche provider of DRAM modules into being a leading SSD provider.

We are very pleased with the financial results we achieved during the third quarter. Net revenue totaled a record $53.2 million, of which $41.5 million, or approximately 78%, was generated from our SSD products. Our focus on SSDs has proven successful, as our third quarter SSD growth rate more than quadrupled to 325%, compared to second quarter year-over-year growth of 81%. On a sequential basis, revenue generated from our SSD products grew 105% over second quarter SSD revenue of $20.2 million.

During the third quarter, we saw our non-GAAP gross margins increase to 19.4% and achieved a key milestone by posting positive non-GAAP EBITDA. These increases were driven primarily by the success of our SSD segment.

Due to our strong SSD growth, coupled with our recent successful financing and the continued weakness of the DRAM market in general, we are happy to announce that we've accelerated our plans to exit completely from the DRAM module business by the end of this fiscal year. It's important to note that we expect our DRAM products will have minimal, if any, sales in the next fiscal year.

With that, I'd like to take a few minutes and speak more specifically about some recent key developments in our business. Our OEM and enterprise and server segments are continuing to gain traction. In December we announced that we've received our first mass production orders from a tier-one OEM for our Deneva MLC-based enterprise class SSDs. As previously announced, these customized Deneva MLC-based SSDs are being deployed as an enterprise storage solution for use in data center applications. We began shipping those orders in the current quarter.

We have continued to expand our OEM client base, and expect our sales of enterprise-class SSDs to ramp as recent design wins finally reach mass production levels over the next fiscal year. We continue to see growth indicators with our current OEM clients across all product categories, as they release new SSD-equipped storage array servers and workstations.

And, as current SSD-equipped products continue to gain traction in the marketplace, we believe that the enterprise server and storage markets are the primary driver for SSD sales growth in the short to medium term.

We noted at the recent CES trade show that a number of major laptop OEMs have added new SSD-equipped laptops and tablet PCs to their roadmaps for the second half of calendar 2011, and while this is not representative of current demand, we believe that the PC and laptop segments will become a driver of SSD growth, specifically versus rotational media, in the medium term.

Just as SSDs are disruptive to traditional hard drives, MLC and EMLC SSDs are disruptive to SLC in the enterprise storage and server segments, due primarily to the lower cost provided by those technologies. We believe we're well-positioned to continue to take advantage of the move from SLC to EMLC- and MLC-based technologies in those segments in the coming fiscal year.

We also believe that as the smaller process nodes of MLC flash become mature, and we see improvements in 3 and 4 bit per cell technologies, that we'll see increased adoption of SSDs in network attached, PC, laptop, and tablet markets due to a lower delta between SSD and hard disk pricing in these segments.

Our IBIS series of HSDL-equipped enterprise MLC SSDs began shipping to clients during the quarter. The HSDL interface, which was developed at OCZ, operates at more than double the speed of fiber channel and SAS interfaces.

Our award-winning RevoDrive PCI-Express SSD continued to ramp as we widened our marketing strategy for PCIE-based SSDs in servers and workstations. Specifically, we introduced our higher-performance RevoDrive X2 series SSDs, which feature two times the speed of standard RevoDrive products, producing up to 150K, 4K random write IOPS. The Revo X2 began shipping to key strategic OEMs during the third quarter for early calendar 2011 product releases, and revenue is expected to ramp throughout the year.

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